Is AeroVironment (NASDAQ:AVAV) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that AeroVironment, Inc. (NASDAQ:AVAV) does use debt in its business. But the more important question is: how much risk is that debt creating?

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When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is AeroVironment's Debt?

You can click the graphic below for the historical numbers, but it shows that AeroVironment had US$25.0m of debt in January 2025, down from US$38.8m, one year before. However, its balance sheet shows it holds US$47.0m in cash, so it actually has US$22.0m net cash.

A Look At AeroVironment's Liabilities

Zooming in on the latest balance sheet data, we can see that AeroVironment had liabilities of US$128.9m due within 12 months and liabilities of US$58.2m due beyond that. Offsetting these obligations, it had cash of US$47.0m as well as receivables valued at US$326.0m due within 12 months. So it actually has US$185.9m more liquid assets than total liabilities.

This short term liquidity is a sign that AeroVironment could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that AeroVironment has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for AeroVironment

It is just as well that AeroVironment's load is not too heavy, because its EBIT was down 66% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if AeroVironment can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While AeroVironment has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last two years, AeroVironment saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that AeroVironment has net cash of US$22.0m, as well as more liquid assets than liabilities. So although we see some areas for improvement, we're not too worried about AeroVironment's balance sheet. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of AeroVironment's earnings per share history for free.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.